Would a Goldman disclosure have helped?

By Felix Salmon
April 19, 2010
posted by Alphaville -- the 49-page September 10 memo, and the 20-page September 25 follow-up. But even without reading the whole thing, it's easy to dismiss the section excerpted by Henry Blodget, which claims that the kind of disclosure the SEC was looking for "would provide a potential investor with no information the investor did not

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I’m still working my way through the two Goldman Sachs responses to the SEC, as posted by Alphaville — the 49-page September 10 memo, and the 20-page September 25 follow-up. But even without reading the whole thing, it’s easy to dismiss the section excerpted by Henry Blodget, which claims that the kind of disclosure the SEC was looking for “would provide a potential investor with no information the investor did not already know”.

But that’s simply not true, as the first line of Goldman’s own slighly-sarcastic disclosure statement reveals:

The Portfolio Selection Agent has received recommendations as to the content of the Reference portfolio from third parties, including a third party that intends to take a short position with respect to the Reference Portfolio.

Upon reading that disclosure, the Portfolio Selection Agent (ACA) would immediately have learned something about which Fab Fabrice had assiduously kept them in the dark — that Paulson intended to go short the CDO.

At that point, the whole history of meetings with Paulson would start being replayed in ACA’s mind a bit like that shoe-dropping moment at the end of a David Mamet film, where the structure of the con is revealed. Only in this case, it wouldn’t have been too late, and ACA would have run very far and very fast in the opposite direction, vowing never to deal with Paulson, Tourre, or Goldman ever again.

It’s still far from clear whether the SEC can or will attempt to pin conspiracy-to-defraud charges on Paulson — my feeling is that they considered the idea, but dropped it for lack of hard evidence. But it’s very clear that this simple disclosure would have done a lot of good. If ACA knew full well that Paulson, with whom it had gone back and forth so many times putting together the portfolio, was in fact constructing it with the express intention of going short, then at that point no one’s lying any more, and there’s no real case to be answered.

So yes, the addition of that disclosure would have made all the difference. As Goldman well knew, because it carefully left that bit out of both the pitchbook and the formal prospectus. If such a disclosure would have added no new information, then there would have been no reason to leave it out.

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